Through its acquisition, community lending, and land-banking programs, Twin Cities Community Land Bank is contributing to the Minneapolis-St. Paul area's foreclosure recovery efforts.

Four years ago, an early springtime drive through low- and moderate-income neighborhoods in the Minneapolis-St. Paul metropolitan area revealed evidence of a housing market malaise: homes with boarded-up windows, front yards covered with matted leaves from the previous autumn, porches littered with rolled-up neighborhood newspapers. Vacant, foreclosed homes dotted the region in alarming numbers.

On an early springtime drive in 2012, the scene in some of those neighborhoods remains much the same.

For many communities, recovering from the negative repercussions of the housing crisis is a long, arduous task. One problem—the increase in vacant, often bank-owned properties—is particularly challenging, as the destabilizing influence of vacancies can cause a slew of side effects that undermine economic recovery. Local governments and nonprofit organizations are employing a range of tools to address the vacancy problem, including one tool designed to convert vacant property to productive use: land banking.

A land-banking organization founded in 2009, Twin Cities Community Land Bank (TCCLB), is doing its part to deal with vacant properties in the Minneapolis-St. Paul area. Although its name implies an exclusive focus on land banking, TCCLB conducts additional programs—created in response to Twin Cities housing market conditions—that go beyond what land banks have traditionally offered.

According to Becky Rom, who recently served as president of TCCLB, expanding beyond land banking enables the organization to contribute more to the Minneapolis-St. Paul area's broader economic recovery efforts.

Says Rom, "The housing market has failed, and TCCLB is here to help address that market failure."

Traditional land banking

As the term suggests, land banking is the act of holding—or "banking"—vacant, foreclosed, or abandoned property until it can be put to productive use. Land banks are the government-affiliated or -endorsed organizations that perform land-banking activities. They can be a function of a municipal department or be a separate nonprofit organization.

Land banks have existed in different cities since at least 1971, when the St. Louis Land Reutilization Authority was formed. While some land banks may share similar economic and housing development goals, no two are dealing with exactly the same property composition or market conditions. Their funding sources, too, frequently differ. Some land banks rely on private foundation and government grants, such as Neighborhood Stabilization Program funding,1/ but most rely on property tax-related revenue streams, among other sources.

Historically, the land that these organizations have acquired consists primarily—though not entirely—of property rendered vacant through tax forfeiture, wherein a municipality takes ownership of a piece of land after the previous owner stops paying property taxes. Tax forfeitures commonly occur in economically depressed neighborhoods, when property owners see too little value in their properties to make it worth paying their property taxes. Because the forfeited land typically has little to no value to outside investors, having a government-sponsored or -affiliated organization "bank" the property, maintain it, and position it for future development can benefit the broader area in the long run. This is the traditional function of land banks.

Over the past several years, however, the nationwide mortgage foreclosure crisis has brought large numbers of a different type of vacant home into the mix: bank-owned properties, also called "real estate owned" properties, or REOs. The flood of REOs is forcing a redefinition of the role that traditional land banks play. Instead of functioning solely as depositories of properties that have next-to-no market value, some land banks are also focusing on short-term disposition of REOs that retain much of their market value. In the Twin Cities, where such REOs make up most of the vacant property inventory, TCCLB operates in this expanded role.

A trio of programs

TCCLB is a nonprofit intermediary that works with private, public, and nonprofit partners to bank or facilitate the disposition of vacant properties in the seven-county Twin Cities metropolitan area. With more than 60,000 foreclosures occurring in this area from 2008 through 2011,2/ finding responsible ways to fill these properties with owners or renters is a direct means to stabilize communities. From its central position among financial institutions, developers, and government funding programs, TCCLB contributes to the stabilization process by working to repopulate vacant properties. To do this, it operates three programs: strategic acquisition, community lending, and traditional land banking.

Strategic acquisition: TCCLB facilitates the purchase of foreclosed, vacant properties by more than 60 affordable housing developers. Working directly with banks as well as with the National Community Stabilization Trust (NCST), a nonprofit organization that negotiates with financial institutions to make their bank-owned properties available for purchase, TCCLB operates as an intermediary between entities that own vacant properties and developers that seek to purchase and rehab vacant properties. The developers rehab and redevelop the properties to make them available to prospective homebuyers and renters, many of whom are low- or moderate-income. Many of the developers' purchases occur through NCST's First Look program, which provides qualified developers with an opportunity to buy bank-owned properties before they hit the open market. By meeting specific construction and hiring requirements, the developers receive not just early access to the listings but also the ability to purchase them at a discount. TCCLB is the local facilitator of this program.

Says Chad Schwitters, executive director of Urban Homeworks, a developer working with TCCLB in its acquisition activities, "The land bank is able to use its connections to help us purchase properties that otherwise would take us a lot longer to acquire."

In addition to providing access to residential properties, TCCLB works with developers to purchase and rehab commercial property, with the aim of stimulating neighborhood revitalization along commercial and transit corridors.

Community lending: TCCLB makes loans available to both the above-mentioned developers and to prospective homebuyers. Because of its status as a community development financial institution,3/ TCCLB has access to a portfolio of funding programs not available to most other financial entities. Qualified developers, if they choose, can access this financing to help them purchase and rehab properties that they acquired through TCCLB or other sources. To gain access to TCCLB's financing, the developers must sell single-family homes to people whose incomes are at or below 115 percent of the area median income (AMI) or responsibly rent4/ multifamily homes to people whose incomes are at or below 80 percent of AMI. Prospective low-income homebuyers, too, may qualify for supplemental financial assistance.

Land banking: In its more traditional, namesake role, TCCLB operates both short-term and long-term land-banking functions. In short-term land banking, TCCLB establishes agreements with developers to buy and hold, for up to one year, single- and multifamily homes that become available for purchase. Developers may wish for short-term land-banking services, for instance, if they do not yet have the capacity to begin redevelopment on a property but will in the near future. In its long-term land-banking activities, TCCLB uses two models: one that is essentially the same as its short-term model, except that the developer agrees to take possession of the property after one year; and another where it directly acquires or accepts donated property and there is no arranged disposition strategy. This last option is being used in a zone of North Minneapolis that sustained heavy damage from a tornado in May 2011.

High acquisition costs, steady housing demand

Two of the three programs described above—strategic acquisition and community lending—illustrate the expanded role TCCLB performs in comparison to a traditional land bank. Two characteristics of the Twin Cities housing market explain this expansion: the overwhelming proportion of vacancies that are due to foreclosure instead of tax forfeiture, and an undiminished demand for housing.

Bank-owned properties—REOs—account for the vast majority of the vacant houses in the seven-county Twin Cities region.5/ For instance, Hennepin County, which encompasses Minneapolis, had 4,953 foreclosures in 2011,6/ but had only 255 properties forfeited through a failure to pay property taxes. The number of tax forfeitures has gradually increased from a low of 34 in 20047/ but remains small enough that Hennepin County and the City of Minneapolis are managing the property maintenance and disposition on their own. According to Rom, TCCLB is ready to work with the county and city if tax forfeitures become a bigger problem.

By contrast, two prominent land banks elsewhere in the country, Genesee County Land Bank in Michigan and Cuyahoga County Land Bank in Ohio, serve jurisdictions that have large inventories of tax-forfeited properties in addition to REO properties. From 2006 through 2011, Genesee County had approximately 7,000 tax forfeitures, while Cuyahoga County had more than 11,000. Municipalities typically transfer tax-forfeited properties to land banks for free. This practice keeps the Genesee County and Cuyahoga County land banks' overall property-acquisition costs low. Moreover, these land banks are legally structured to receive a large amount of funding from fees associated with property taxes.

In the Minneapolis-St. Paul area, where the supply of free or inexpensive tax-forfeited properties is small and REOs that have retained much of their market value are predominant, the costs for TCCLB to acquire vacant properties are high. To date, while some banks have agreed to sell REO properties to TCCLB for as little as $1, the average cost per house has hovered closer to $70,000. And TCCLB receives no property tax-related funding. Instead, it relies on grants, loans, and revenue earned from its property transactions.

In Rom's estimation, "The highest barrier to land banking in the Twin Cities is cost."

Aside from the predominance of REOs, the other market factor that shapes TCCLB's activities is housing demand. The population in the Twin Cities region has remained steady over the past decade, meaning demand for housing is largely unchanged. The undiminished demand is what underlies the relatively high market value of REOs. It also underlies TCCLB's approach to property disposition. While some properties in the Twin Cities region are unfit for habitation and therefore need to be demolished and either banked for future use or sold for new construction, the steady demand for housing means TCCLB has reason to maintain, not shrink, the overall housing supply.

By contrast, in Genesee and Cuyahoga counties, there has been significant population loss. Flint, the city in Genesee County that receives the most land-banking attention, saw an 18 percent population decline between 2000 and 2010; and Cleveland, the primary city in Cuyahoga County, lost 17 percent of its population over the same period. More telling is the loss in each city since 1960: Flint has experienced a departure of 48 percent of its residents, while Cleveland has lost 55 percent. With such major contractions in population size, Genesee and Cuyahoga counties have lower demand for housing than they did in the past, so they aim to shrink the housing "footprint" by offering options such as side-lot transfers, wherein the land bank demolishes a vacant house and then sells the cleared parcel of land to the individual who owns the adjacent property.

Expansion and enhancements

As of December 31, 2011, TCCLB has facilitated, through its strategic acquisition program, more than 360 single- and multifamily property acquisitions while helping developers save more than $4.5 million. Through its community lending program, for which it is building a $26 million loan and grant fund,8/ TCCLB has financed the purchase and rehab of 143 single- and multifamily properties as well as 3 commercial property developments. And through its land-banking program, TCCLB has held 18 single- and multifamily homes in short-term land-banking status and 6 properties in long-term land-banking status, 2 of which are donated houses in the North Minneapolis "tornado zone."

Looking ahead, TCCLB's leadership sees potential for expansion and, perhaps, some hoped-for enhancements. Long-term land banking—the core, traditional activity performed by land banks—is one area where TCCLB plans to expand its work, despite the fact that the costs associated with it—for demolition, lot maintenance, property taxes, and assessments—are high. To acquire a house, demolish it, and bank the property for five years, TCCLB estimates that it would spend $35,000—a figure that assumes the property is donated. If a house is purchased rather than acquired for free, TCCLB's costs would increase by the purchase price. Still, TCCLB plans to add to its long-term land bank inventory by acquiring heavily damaged homes in the North Minneapolis tornado zone. And to help pay for these acquisitions, it plans to draw on a $3 million fund composed of a mix of grants, loans, government waivers (property tax and assessment waivers), and income from sales, including the acquisition, rehab, and resale of foreclosed and vacant houses outside of the tornado zone.

Rom suggests several enhancements that would enable TCCLB to further its activities, including:

Receiving greater discounts from financial institutions on REOs. Currently, through NCST, developers are offered available REOs at a discounted price. The discount varies by property, market, and financial institution; in the Twin Cities, it averages 15 percent. A greater discount granted by financial institutions would enable the pool of qualified developers to purchase, rehab, and resell or rent even more of the available REOs.

Receiving more property tax and special assessment waivers. Additional property tax and assessment waivers from local governments would help reduce the $35,000 figure stated above.

Receiving more "patient" capital to purchase properties for long-term land banking. By having an increased amount of long-term, or patient, funding, TCCLB would be able to acquire more properties to hold in long-term land-banking status.

"Many of our problems require access to capital," Rom explains. "And having access to more money will help TCCLB have a bigger positive influence on the housing market recovery."

Four years from now, will an early springtime drive through the Twin Cities area reveal evidence of a housing market rebound? With such a large inventory of foreclosed homes in the region, the answer isn't clear. Yet after a half decade of TCCLB's acquisition, lending, and land-banking efforts—along with the housing stabilization efforts employed by other organizations and government departments—the likelihood of a rebound becoming a reality is stronger.

More on the NCST

Created in 2008 to help local communities weather the foreclosure crisis, the National Community Stabilization Trust (NCST) supports the revitalization of areas that have experienced high numbers of mortgage foreclosures by working with financial institutions to sell bank-owned properties to community buyers. The NCST was initially formed by four national affordable housing organizations—Enterprise Community Partners, Housing Partnership Network, Local Initiatives Support Corporation, and NeighborWorks America. The National Urban League and the National Council of La Raza later joined as fellow sponsors. In 2011, NCST, which is funded through grants and compensated with property transaction fees paid by financial institutions, facilitated the transfer of nearly 2,000 properties. The transactions totaled $149 million in sales and saved local housing providers nearly $19 million.

1/ The Neighborhood Stabilization Program was initiated in 2008 by the federal government to channel redevelopment funding to communities hit hard by the foreclosure crisis. Under the conditions of the legislation, establishing and operating land banks is a permitted use of the funding. For more information, visit www.hud.gov/nsp.

2/ This figure is a count of completed sheriff sales (i.e., the step in the foreclosure process wherein the property is auctioned to a new owner). It was obtained from sheriff sale data collected by Housing Link, a nonprofit organization that makes Minnesota-focused housing data readily available. For more information, visit www.housinglink.org.

3/ Community development financial institutions, or CDFIs, are specialized entities that provide lending, investments, and other financial services in economically distressed communities. For more information, visit www.cdfifund.gov.

5/ It is worth noting that not all foreclosed properties are vacant; some may be occupied by owners or renters until the foreclosure process runs its course. (For more on renters living in foreclosed properties, see the article "Protecting Tenants at Foreclosure Act guarantees renters a baseline of legal rights" in this issue.) But even if, hypothetically, only half the foreclosed properties in Hennepin County were vacant, the number would still dwarf the number of tax forfeitures.

7/ Tax-forfeiture figures are from the Hennepin County Taxpayer Services Department, as reported in the Star Tribune on February 26, 2012.

8/ The $26 million is made up of a collection of funding sources that have different restrictions. For example, developers may access specific pools of funding to help finance the acquisition of a property, while prospective homebuyers may access financial assistance from a targeted fund that is repayable upon resale of the house. Additionally, some nonprofits may apply for a grant to use for environmental assessment or remediation projects.

9/ In the cases where the Cuyahoga County Land Bank deals with REOs, several banks contribute up to $7,500 per property to help defray the cost of demolition.